Weekly Market Wrap – 25 June 2021

536
Written by Citadel Global Director,
Bianca Botes

COUNTRY UNDER SIEGE

While some parts of the world are celebrating COVID-19 victories, South Africa is facing another potential round of stricter lockdown regulations. This could see the largest economy on the African continent come under even more economic strain.

Major themes for the past week include:

  • South Africa’s COVID-19 cases soar
  • Bank of England (BoE) keeps interest rates steady
  • United States (US) GDP growth meets expectations

COVID-19 RESURGENCE

With South Africa being one of the most significant emerging markets, and also being responsible for the most economic activity on the African continent, its rampant third wave is catching the attention of not just local residents, but also of international investors.

Being early winter, South Africa’s COVID-19 infection rate is extremely concerning. The country’s daily cases have topped the 10 000 mark and South African President, Cyril Ramaphosa, has raised the alarm. The biggest threat is to be found in the country’s economic hub, Gauteng, where more than half the current cases have been recorded.

Earlier this week, calls from Netcare CEO, Richard Friedland, to impose lockdown level 5 on Gauteng, was of utmost concern, especially given the number of people who lost their businesses and jobs during the country’s first hard lockdown in 2020.

But as infection numbers rise and hospitals are unable to cope with the influx of patients, we can understand the calls for stricter restrictions. However, shutting down industries as a whole, as seen in 2020, could cause more harm than good in an economy that is already under strain and with unemployment figures at their highest level on record.

Having said that, the socio-economic fabric of South Africa will feel the effects of the decisions made now for years to come. Government has to weigh up the lives vs livelihoods issue. And with the current rate of infection, most South Africans have now been impacted by the virus in one form or another.
 
While there is lot of speculation about how strenuous the restrictions will be, especially in Gauteng, some of the most likely scenarios are:

  • Tighter restrictions on alcohol
  • Extended curfews
  • A clamp down on all public gatherings
  • Stricter enforcement of regulations, including fines and arrests for breaches of regulation

THE GLOBE AT A GLANCE

Similar to the recent stance we have seen from the US Federal Reserve (the Fed) and the European Central Bank (ECB), the Bank of England (BoE), on Thursday, also downplayed the current inflationary pressure at play in the markets. In their announcement, the bank kept interest rates unchanged, sticking to their accommodative monetary policy stance and labelling the current rise in inflation as “transitionary”. The bank did however note that short-term upward pressure on prices might be higher than initially anticipated.

The yield on UK 10-Year Government Bonds dipped to 0.77%, following the interest rate announcement by the BoE to keep interest rates steady. The bank also pledged to maintain the current monetary policy stance until there is clear evidence that significant progress is being made in eliminating spare capacity, and they have achieved the 2% inflation target sustainably.

Money markets brought forward bets that the BoE would start raising interest rates sooner than expected, after inflation in May reached its highest point in nearly two years. Meanwhile, British scientists and government officials said lockdown measures could be eased further despite a surge in COVID-19 numbers, if the vaccination continues to prove effective in combating deaths and hospitalisations.

Producer prices in South Africa jumped by 7.4% year-on-year in May. The reading is the highest producer inflation rate since July 2016.

Taking a look at one of the most important European economies, the German Ifo Business Climate indicator rose by 2.6% from the previous month, the highest level since November 2018.  Europe’s largest economy is picking up some traction following relaxation of COVID-19 restrictions.

Meanwhile, in the US, the number of Americans claiming unemployment benefits fell to 411 000 in the week ending 19 June, from a revised 418 000 in the previous period and compared with market expectations of 380 000. Employers have however raised concerns about the difficulty to hire. They blamed ongoing labour shortages, due to enhanced unemployment benefits, concerns about contracting COVID-19, and finding childcare.

The US economy grew by 6.4% (annualised) in the first quarter, meeting market expectations, following a 4.3% expansion in the previous quarter. 

The yield on the US 10-year Treasury Note erased early gains to fall slightly below 1.5% on Thursday, after economic data revealed that durable goods orders rose by 2.3% in May, undershooting market expectations of 2.8%. The yield however, remained well above the four-month low of 1.36% reached earlier this week.

EQUITIES IN THE GREEN

US futures traded largely in the green on Thursday, with contracts on the S&P 500 and the Nasdaq hitting fresh highs, while investors digested fresh data and recent comments from Fed officials. Traders will also be keeping an eye on infrastructure package negotiations, as US President Joe Biden has invited infrastructure negotiators to the White House.

European stocks traded positive, with Frankfurt’s DAX 30 adding 0.8% and other major indices gaining between 0.4% and 1.6%, as investors welcomed upbeat economic data indicating that German business morale rose in June to the highest level since November 2018.

The UK-based FTSE 100 rose just over 0.5%, after the BoE held interest rates at record-low levels and left the £895 billion bond-buying programme unchanged as expected.

The Japanese Nikkei 225 ended the day flat on Thursday, following a similar session on Wednesday, after minutes from the Bank of Japan’s (BoJ) April meeting indicated that policymakers agreed that the massive stimulus measures deployed by advanced nations may help quicken the pace of recovery in the Japanese and global economies. Looking at individual stocks, Mercari gained 8.5% after forecasting its first annual profit since its listing in June 2018.

The South African JSE All Share Index traded marginally higher on Thursday, the highest since 17 June, assisted by shares of miner Kumba Iron Ore. The mining giant noted that it expected half-year earnings to rise at least 150%, bolstered by higher export iron ore prices and a stronger rand-to-dollar exchange rate.

ECONOMIC RECOVERIES BOOSTS OIL

West Texas Intermediate (WTI) crude futures remained on the front foot for the third consecutive week, trading at $73 per barrel on Thursday, the highest level since October 2018 amid falling inventories and demand recovery hopes lifted sentiment.  News that the expanded Organization of the Petroleum Exporting Countries (OPEC+) is planning a further gradual increase of oil output from August was largely overshadowed. The Energy Information Administration (EIA) Petroleum Status Report showed US crude oil inventories fell more than expected, by 7.61 million barrels in the week of 18 June.

Gold remained submissive, trading around $1 780 per fine ounce on Thursday, near the recent seven-week low of $1 760. Investors continue to digest mixed signals from Fed officials on interest rate hikes and continue to monitor economic data to gauge inflation risks.
 
Copper futures gained back some ground, to trade at $4.20 per pound in the fourth week of June but remained close to levels not seen in over two months, as a strong dollar dominates and as China is set to take measures to curb any further rise in commodity prices.

Coal futures soared past $121 a tonne for the first time since October 2011, as supply constraints and higher demand offset China’s efforts to tame rallying commodity prices. Meanwhile, output restrictions in Shanxi production hubs, amid tighter safety inspections and environmental curbs, as well as the closure of the Mongolian border due to COVID-19, led to a reduction in domestic coal production.

DIGESTING INFLATION

The dollar index continued to retreat on Thursday, as the reflation narrative ran out of steam. It is apparent that the Fed merely signalled the chance of higher-than-expected inflation and that no active steps are on the cards to counter it just yet.

The euro held above the $1.19 mark, recovering from a near two-month low of $1.185 reached on Monday, as hopes of a solid economic recovery in Europe boosted sentiment. Meanwhile, ECB President, Christine Lagarde, stated on Monday, that brighter prospects for global demand and a faster-than-anticipated increase in consumer spending could result in a stronger economic recovery.

The British pound dipped towards $1.39 on Thursday, after the BoE left monetary policy unchanged and pledged to maintain the current stance.

The South African rand was little changed at R14.20 against the greenback on Thursday following its recent lows of R14.39, as the dollar held just below 11-week highs.

We started the day trading at R14.18/$, 16.93/€ and R19.75/£.